As global fund managers, one of the most important areas of focus for many of the companies we research is around talent acquisition and retention.

This issue goes beyond not just ensuring the brightest minds remain on the books but also extends towards becoming an employer of choice in an increasingly competitive market. This is made all the more difficult due to the growing expectations laid down or justly expected by a labour pool that is, as we stand today, heavily in demand. As a result, it is becoming more and more intrinsic to a company's position within their respected industry to ensure their organisation is, in fact, an attractive proposition for any prospective candidate.

A winning talent management strategy therefore should be viewed as a robust advantage, that may prove to be just as critical to the company's long-term success as the competitive moat around the business itself.

Employee retention - an 'old school' metric or one to cast a sharp eye over?

One metric that can get often overlooked is that of the retention rates of company staff.

Whether it relates to a technology business, a retailer, or a consulting firm, the cost of replacing any given employee is greatly underappreciated. According to estimates out of the Work Institute's 2017 Report, the replacement cost for an employer averages roughly 33% of an employee's annual salary for their exit.

A company we believe is industry standard when it comes to placing a stringent focus on retaining its talent and expertise is the paintings and coatings business, Sherwin-Williams (SHW-US), which operate close to 5,000 stores around the US.

While providing competitive compensation and benefits for its staff, the company prides itself on the discipline of its execution and is known to train staff "like the military". Store managers usually start as graduates but are often treated as business owners. This may sound like a talent strategy from a bygone era, however, this tried-and-tested method from a 155-year-old company creates an exceptionally low staff turnover of 7-8%, or 5-6% for store managers and sales reps.

We begin to appreciate how impressive this number is when measured against the US Bureau of Labour Statistics' annual turnover figures across both retail and wholesale channels.

Annual US employee turnover by sales channel

Source: US Bureau of Labour Statistics

This incredibly low churn creates real loyalty from the company's professional customers, who take comfort in the fact that the staff member they are dealing with on a daily basis is, in fact, an expert in what they sell.

"The managers of the big brands have a very clear responsibility. It's attracting and keeping talented people in order to sustain and build the trustworthiness of that brand. There is no clearer objective in the economy. Your economic success depends on expanding and building your economies of trustworthiness." - Robert Reich

The company also pushes the notion of upward mobility (everyone knows the CEO started in the stores), providing a tangible path to move into management positions, and areas of increased responsibility, if they remain at the business over the long term.

The growing importance of scale

The aptly termed "war on talent" could not currently be any more evident than in the technology and digital industries. The sheer pace at which the world has evolved in partnership with an accelerated digital transition through the pandemic has pushed demand for top-quality personnel to an extreme level.

One of the key dynamics we have noticed is the unmatched strength at which the large technology firms are able to exert when looking to attract talent out of a thinning top-end labour market. These larger technology players are able to offer potential candidates extremely competitive pay and benefits packages, heavy investment in training and strong career progression opportunities ― in addition to offering a meaningful company mission and purpose that may strike a chord with those looking to make a tangible difference in how we live our everyday lives.

As we can see in the chart below, many of Sherwin-Williams' competing players are struggling to compete for top-end talent due to the likes of the "hyper-scalers" sucking up this talent at unprecedented rates. The company's older and arguably less-savvy competitors are suffering "brain drain" if desired work experiences, compensation and benefits, or career progression opportunities are not fulfilled.

US software engineer and software developer hires

Source: BainAura talent platform, Bain

For context, while many companies were furloughing staff amid the pandemic's economic fallout, Microsoft (MSFT-US) saw its employee base rise 18,000 or 11%, with Alphabet's (GOOGLE-US) base also rising net 16,000 employees or 13%.

This has developed into a seriously large competitive advantage for the large technology firms and, as current shareholders of both companies, provides us with comfort that they will be able to continually drive innovation and product development with the pools of talent they have in their corner.

"What's most impressive is that your team (Google) has built the world's first self-replicating talent machine. You've created a system that not only hires remarkable people, but also scales with the company and gets better with every generation." - Paul Otellini, Former President and CEO, Intel

An alternative strategy

This system of managing and curating talent extends beyond simply retaining existing personnel and hiring new staff. The strategy of careful, diligent M&A to bring in experts that not only have the skills to drive sustained innovation and product development but actually want to work for the broader organisation, is one that cannot be overlooked.

We see this dynamic present itself in areas such as medical and analytical instruments, where it can be more efficient to bring in a team of scientists or technicians through bolt-on acquisitions into the umbrella organisation, rather than invest in years of internal R&D and training in order to develop specific products or technologies.

We have been most impressed by this method of talent management through another one of our portfolio holdings, Agilent Technologies (A-US). Their large team of highly skilled field scientists is one of the most underappreciated assets of their business and the retention of this talent is critically important to the sustainability of their business model. This was shown over the course of the pandemic when they did not move to reduce staff, nor did they cut base pay or hours, as a response to the temporary disruptions across the business.

According to Agilent's CEO Mike McMullen, this has led to attrition rates that sit at much lower levels than peers in the market. However, a key piece in the evolution of their team of scientists is the onboarding of R&D teams through focused acquisitions of appropriate target companies, subsequently integrating them into the larger Agilent ecosystem.

This can be witnessed through one of their most recent acquisitions in BioTek, a leading cell analysis business, of which then-owners, the Alpert family, sought to sell their company to Agilent as they appreciated the prevailing culture and long-term synergies across their respective R&D teams.

"The cultural alignment, the consistency and commitment to the same sort of core values really do matter." - Mike McMullen, Agilent CEO, Goldman Sachs Healthcare Conference, Jan-21

Agilent's stringent focus on an engineering-led culture allows them to present themselves as an attractive suitor to smaller, niche businesses with bands of top-end scientists and experts in their fields that do not necessarily want to be swept into a corporate behemoth.

This enables them to not only bolster the talent pool across the organisation but retain them over the long term, which will, in turn, materialise into tangible value creation for shareholders through sustained innovation and product development.

Intrinsic to longevity

Talent management can no longer be dismissed as simply an HR problem. It is becoming so critical in today's world that if a company mismanages its workforce, a loss of competitive advantage and profitability will present itself as the most likely outcome. The subsequent costs of recruiting, training, loss of expertise, potentially fractured relationships with customers, wage inflation, and cultural tearing all need to be placed in heavy consideration when curating a talent management strategy.

We ensure that the businesses we invest in and research at Claremont Global have sound strategies in place to manage their pool of talent, ensuring that they not only retain the best people but also attract top-flight talent in the market to drive sustained innovation and product development well into the future. Authors and consultants, Rob Silzer & Ben Dowell, capture this phenomenon perfectly:

"Talent management is more than just a competitive advantage; it is a fundamental requirement for business success." - Silzer & Dowell, Strategy-Driven Talent Management: A Leadership Imperative.

Author: Luke Davrain, CFA, Investment Analyst